Interview with Miranda Ademaj, Skënderbeg Alternative Investments

Miranda AdemajMiranda Ademaj is the CEO of Skënderbeg Alternative Investments. Prior to establishing Skënderbeg, Miranda worked at fund of hedge funds pioneer BrunnerInvest and Sallfort Privatbank. Before that, she worked at Credit Suisse for several years. Miranda is a CAIA candidate and member of the global association „100 Women in Hedge Funds”. Your Skënderbeg Fund has created some buzz lately. What is your investment strategy?
Ademaj: Our investment universe consists of global long/short equity funds with low net exposures. The investment philosophy of our fund is based on the motto “boring is good”. We need some risk to make returns, but we don’t want drawdown risks. The Skënderbeg Fund has a very low live beta and a slightly negative correlation to the markets. We invest in smaller but established hedge funds that are “below the radar”. Our strategy allows us greater access to management teams and enables us to get full transparency. It provides us with a better chance to uncover hidden gems. The positive, steady, eventless, and therefore “boring” compounding of capital while avoiding sharp drawdowns is the most elementary part of successful long-term investing. Our approach is to come back to the solid roots of long/short equity investing rather than trying to reinvent the wheel by launching some fancy products, which nobody understands. The three founders Bruno Schneller, Thomas Fliegner and I have worked closely together at Swiss fund of hedge funds (FoHF) pioneer BrunnerInvest before launching Skënderbeg. We are not only a new FoHF, but also a new FoHF company, which is something rather unusual in these days. We are not the “last of the Mohicans”, but rather the “first mover” of the new FoHF generation because of the lessons learned in 2008. How do you manage risk with such a concentrated portfolio?
Ademaj: Many recent studies have shown that a FoHF can obtain all the diversification required by simply investing in only 10 to 20 hedge funds. This number is even lower for specialized FoHFs. Excess diversification increases left-tail risk (22% of FoHFs and 30% of multi-strategy FoHFs failed during the latest financial crisis!) and lowers returns. The last fact is usually attributed to the cost of due diligence that increases with the number of hedge funds. Moreover, it has been demonstrated that the variance-reducing effects of diversification diminish once FoHFs hold more than 20 underlying hedge funds. Therefore, Skënderbeg seeks to maximize diversification while minimizing the number of manager allocations. In our opinion, concentration is critical to superior long-term performance and survival. It’s better to really know your underlyings than to be over-diversified with things you don’t understand. You are currently invested in UCITS hedge funds as well. How important is the type of fund wrapper in your due diligence process?
Ademaj: Long/short equity funds neither rely on excessive levels of leverage nor are they particularly prone to a lack of liquidity. Therefore, we could in principle opt for UCITS funds as a liquid alternative. However, we are very aware of the potential problems with UCITS vehicles. Compared to the off-shore product on which they are modeled, alternative UCITS funds may require significant re-engineering of the portfolio to make them UCITS compliant. This, together with the benefit of liquidity, typically has a negative impact on performance. Moreover, the Eligible Assets Directive and short-selling restrictions force fund managers to use cash-settled derivatives to replicate an off-shore strategy. This results in an enhanced exposure to OTC derivative contracts. Therefore, we would normally go with the off-shore version. Only if the UCITS product is run pari-passu, the returns are not lower and fees and operating costs are not higher compared to the off-shore fund, would we consider investing in the more liquid UCITS product. Since Skënderbeg Fund offers, with monthly dealing, very favorable liquidity conditions for a FoHF, we allocate, as a general rule, roughly a quarter of the portfolio to funds with better than monthly liquidity. What are your market expectations for 2015 in general and for the UCITS hedge funds market?
Ademaj: 2014 was a challenging year for most active managers, regardless of their strategy or style bias. According to Morningstar, 80% of US equity fund managers underperformed their respective benchmarks, publically reported to be their worst relative performance in 30 years. UCITS hedge funds, especially those managing long/short equity strategies, also had a challenging year. While there is a multitude of reasons for this broad based underperformance, low relative volatility, low dispersion, and higher relative correlations among individual stocks were major contributing factors for many managers. The good news for many active managers is that higher levels of volatility appear to have returned to the equity market. We believe, volatility will be considerably higher in 2015 relative to 2014, which should be beneficial for the funds we invest in. Against this backdrop we are convinced that the Skënderbeg Fund will continue to be well-positioned. We feel that our uncorrelated low beta portfolio with a low net exposure provides effective upside potential, low managed volatility of returns, protection in down markets, and superior risk-adjusted returns through a market cycle. 2015 promises to be a year of opportunities and it’s going to be our job to seize those that work in the context of our strategy. Thank you for the interview.